Village Farms International, Inc. (VFF) Earnings Call Transcript & Summary

Good day, and welcome to the IAccess Alpha Virtual Best Ideas Fall Investment Conference 2026. Our next presenting company is Village Farms International, Inc. [Operator Instructions] I'd now like to turn the floor over to today's host, Sam Gibbons, Senior Vice President of Corporate Affairs and Investor Relations at Village Farms International, Inc. Please go ahead.

Thank you, Matt. Glad to be here today. We are -- I think it's a timely -- time to revisit the space for potentially some generalist small-cap investors who don't traditionally look at our industry. So happy to be here today and take you all through the Village Farms story in a little more detail. Village Farms today is a top 10 global cannabis operator by market capitalization. It's about a $350 million market cap. We are profitable. We are one of the most profitable cannabis companies in the world, about $290 million in trailing 12-month sales and a really attractive organic growth platform that we think is positioned for success regardless of any regulatory outcomes in the United States. Before we get into the guts of the presentation, I'll just spend a few minutes talking about our history, and how we've built the company and our asset portfolio today, but we've actually been public since 2006, founded in 1989, almost 4-decade track record of execution in large-scale agriculture -- controlled environment agriculture. We are today the result of the combination of the two largest greenhouse operators in the U.S. and Canada, which occurred back in 2006. But our roots really began building and developing greenhouses, up and down the Northeast -- Eastern seaboard in the United States. And over time, sort of transitioned from developing these greenhouses to operating these greenhouses. And eventually, we realized that in order to be successful, you really need to be large-scale, low cost, and that's the footprint that we have today. It's one of the largest scaled platforms in global cannabis. And through our 37-year history, we've kind of been crop agnostic. We started in cut flowers, stem flowers, roses, transitioned to produce. And when the Canadian government legalized cannabis back in 2017, began to convert our Canadian assets to cannabis cultivation. So just a little background on the company. Move to the next slide here. Just a brief summary of some of the key investment highlights, which we'll run through today, which are sort of core to the thesis, and why we think we're an attractive global player in this industry. As I mentioned, one of the world's largest scale platforms to capitalize on increasing demand for regulated cannabis. We executed the transaction last year to privatize our legacy produce business which created a global cannabis pure play with industry-leading profitability. We'll get into some of the details of that transaction a little bit later. And our Canadian asset, which is 4.8 million square feet of production capacity in Delta, BC, is the world's largest EU-GMP-certified cannabis production facility in the world. EU-GMP standards is the gold standard in getting product in the Europe -- compliant product into Europe. We have a rapidly expanding international business today. We are one of the lowest cost producers of cannabis in the world. And combined, these strengths, we think, give us durable long-term competitive advantages. And we've also attractive near- and long-term opportunities for continued revenue growth and value creation, which we'll get into as well. Balance sheet is in a great position today. Like I said, we're profitable -- sustainably profitable with a lot of incremental growth opportunities and investment opportunities on the horizon. So we'll shift to the next slide here, which provides a little bit of a high-level overview of our asset portfolio today and 7.2 million square feet of advanced greenhouse and indoor cultivation assets across the world. The bulk of those two facilities is spread across our assets in Delta, BC and West Texas. We are -- also operate two indoor facilities in Quebec. When we -- initially, when the Canadian market started, you needed to operate in Quebec to sell product into that market. That's no longer the case today. But we also recently completed construction of our European headquarters effectively, which is in the Netherlands market. This is the bulk of the asset portfolio today, and we believe mega-scale greenhouse assets. These mega-scale greenhouse assets will allow us to scale cost effectively over time with continued increases in demand. Our track record in controlled environment agriculture, plant-based consumer goods and really operating global supply chain through our legacy history in produce has helped us execute in these expanding international markets. On the previous slide, actually, we'll go back and highlight, we're only cultivating cannabis in about 30% of our asset portfolio today. The assets in West Texas, a large portion of them have been leased back to produce partner with the transaction we executed last year, and our Delta, BC, platform is only growing cannabis about 2.2 million square feet of that 4.8 million square foot footprint. So a lot of incremental runway to continue to grow into this footprint over time. Slide 6 is just an overview of kind of how we've scaled this cannabis platform over the last several years. As I mentioned, we were predominantly a produce company until the Canadian government legalized cannabis, but that transaction we executed in May of last year has created a global cannabis pure play. Almost the entire business is cannabis sales today. We do have about $20 million to $25 million in revenue from our Delta 1 greenhouse in Canada that's growing produce for our private equity partner. But I think some other keys on this slide are a methodical expansion into this capacity over time. We've scaled it prudently. We -- the Canadian business -- Canadian cannabis business has been profitable in perpetuity. We were very early in getting into the international export markets. It's become a very hot topic today, I think, in our industry, but we've been there for a long time, saw the opportunity, made the investments, and doing things the right way and building a compliant supply chain with our EU-GMP certification. We started working on back in probably 2021 and first received in 2022, recertified in 2024, and in May of this year after some incremental investments we made in that facility, Delta production facility is now the world's largest single-site EU-GMP-certified facility. As I've mentioned a couple of times last year, we completed a transaction to privatize the legacy produce business. That brought in about $40 million in cash. We still own 37.9% of the equity in that new platform, which is called Verdexa Holdings. And since that transaction closed, Village has been one of the most profitable cannabis companies in the world, I'm talking about on a net profit margin basis. And so the combination of the transaction, plus the rapid growth in the international markets and continued operational excellence and efficiency gains in our platform have created a really attractive profitable cannabis operator with continued runway for strong organic growth. Slide 8 is just a quick summary of the brands. The top 3 brands you see, Pure Sunfarms, Super Toast and Fraser Valley, are really the core of the portfolio in Canada's adult-use market today. We are perennially a market share leader in dried flower. I think that's something that typically gets overlooked just with the size of our portfolio. There is a -- you're not successful if you're not producing quality products, and the Pure Sunfarms brand, Super Toast brand, Fraser Valley brand have all developed strong preference with consumers. We consistently are delivering strains in the mid- to high 20s and even low 30s percent THC across the platform. And then I'll also note the CBDistillery brand on the bottom left is our U.S. platform that's direct to e-commerce CBD business. There is a pending hemp ban that's been delayed in the U.S. We're waiting for some clarity there. But that business has been looking at ways to participate in the new CMMI pilot, which Trump announced back in April. It's been a little slow to get off the ground, but there is still attractive long-term opportunity for that business if -- depending on how the regulations ultimately fall. The brands on the bottom part of the slide are some of our more Quebec-leaning brands. But out of the portfolio we've developed. We'll move on to the next part of the presentation here with an aerial overview of the Delta production campus. As I mentioned, this is the world's largest EU-GMP-certified production facility. We initially converted the Delta 3 greenhouse to cannabis production back in 2018 after Canada legalized. And so the orange bubbles here are kind of placed in the middle of each of these facilities, D1, D2 and D3. The first half of that D2 greenhouse has been in cannabis production for several years, but we're nearing the completion of the expansion of the second half to cannabis. So those two facilities, D2 and D3, will produce approximately 160 tonnes of dried trimmed cannabis flower annually. And I'll note that does not include trim. That is, I think, an important differentiator for folks to understand. But the -- I think the key on this slide is, we are doing a pretty substantial revenue over $200 million in trailing 12-month sales from these -- the D3 and half of the D2 facility, with plenty of runway to continue to grow into the D1 greenhouse over time with increasing demand. We are contracted to grow produce for our -- for Verdexa Holdings in the D1 greenhouse. We have the option of converting that on a 25% conversion rate every year for the next 4 or 5 years if we elect to do so. So we feel really good about the way we're positioned to continue to scale with increasing global demand. Slide 10 is just going to provide a quick overview of our rapidly expanding international business. I'll focus a little bit on Europe because Europe is -- it seems like Europe's several years behind sort of the domino effect that occurred in the U.S. cannabis markets, which have been converting from medical to adult use over the course of the last 8 years or so. But Europe is kind of having that domino effect now, and we export from Canada to international medical markets. We have a leading market share in Germany's medical market that's well over a $1 billion medical market, continuing to grow really nicely. We think that market will continue to grow for the foreseeable future. We export to the U.K. We also export to Australia and New Zealand, and we've said that we expect to enter multiple new export markets later this year. The color coding on this is really designed to just highlight which markets are kind of open and accessible in orange and the blue ones are countries that are kind of in the early days of getting more attractive programs off the ground running, and a lot of these countries are places where we see great long-term opportunities. I'll just highlight the revenue trajectory, which -- our international sales now approaching $100 million run rate, including the Netherlands business, which we'll get into in a little more detail here. But really, this is a growing business that we see potential for continued strong organic growth for the foreseeable future. I also think we've talked on some of our recent public calls about the fact that our EU-GMP certification is a competitive advantage that we think is going to enable us to be more insulated from price compression as markets -- as these international markets continue to mature. There is scarcity of EU-GMP-compliant product. Customers are interested and willing to pay a premium for the ease of doing business that creates in their supply chain. The German government has started to crack down on noncompliant aspects of the supply chain, which really positions us well as a market leader. Our Netherlands business, we are 1 of 10 license holders in the adult-use market over there. This is not a medical market. So we do not export to this market. We actually have assets and boots on the ground here. It's, I mean, a highly attractive long-term market for us. Of course, everybody knows the culture in the Netherlands is synonymous with cannabis in Amsterdam. It's a highly attractive market from a pricing standpoint. Pricing per gram in coffee shops is, in many cases, north of EUR 10 compared to -- in Canada, it's one of the most competitive markets in the world. It's a small fraction of that pricing. So we are incredibly proud of the Phase 2 facility we've built, completed earlier this year, serves as our European headquarters. That facility will be ramping to full production through Q1 of next year, which will bring our maximum production capacity to about 10 tonnes, that will help us really continue to drive strong revenue growth through next year in addition to the Delta 2 expansion that we have nearing completion in Canada. I'll just note on Slide 13 here, some of the things that we are looking at and focused on executing from a growth standpoint, an investment standpoint. The Canadian market, it's approaching a $6 billion market today. It's growing mid-single digits. We expect to grow our Canadian business in line with that growth rate, and we'll continue to grow from increasing demand from our existing markets in Canada and our international markets as well as expansion to new service -- new customers and new international markets, as I mentioned, as well as potential participation in the CBD pilot program. Talked about our growth investments in our Phase 2 facility in the Netherlands and Delta 2 expansion. That Delta 2 expansion is adding about 40 metric tons over the course of the next, call it, 6 months or so. That's about a 33% increase in our production -- in our Canadian production capacity compared to fiscal year 2025. With considerable runway to continue growing into that facility over time. And we're also looking at expansion into new product and category introductions, getting more -- a little more indexed into vapes, manufactured products, convenience products is an important focus for us long term. And we are also looking at strategic partnerships and M&A opportunities. We recently announced that our longtime CFO, Steve Ruffini, who's been with us for 17 years, is transitioning to lead our M&A efforts. There is a pretty attractive opportunity set globally. We think where there's opportunities for us to kind of hit singles to add incremental value to our portfolio and also opportunities in the United States, including in that opportunity set. Our Texas assets are kind of the long term -- very long-term play. We're on record saying we expect to be in Texas someday. We plan to be in Texas someday, but that medical program is mired in some controversy right now on the issuance of new conditional licenses. We think it's going to take some time to play out, but we do expect to be there, and there's also a number of other opportunities for us to get into the U.S. market. But we likely won't do anything until we have complete regulatory clarity with the U.S. market, rescheduling of medical cannabis is kind of through the finish line here. The process to reschedule. Adult use is awaiting a final ALJ judge recommendation after concluding recent hearings to reschedule adult use, eagerly awaiting the outcome of that before we can make some decisions on activating our U.S. strategy. But regardless, the portfolio we've built, the execution we've built, our profitability has positioned us as really a partner of choice and acquirer of choice in many cases. But we will be extremely patient with respect to activating any of these opportunities with a focus on long-term value creation and strategic assets for how we see the future of regulated cannabis evolving over the course of the next several years, and frankly, decades. Slide 14, we've talked a little bit about our Texas footprint. We've got about 50 acres of advanced greenhouse assets that we still own in Texas after closing the produce transaction we completed last year. Those assets represent about a $400 million revenue opportunity for us if we were able to convert to cannabis someday. And I'll also reiterate -- our view has always been that we don't need to be a first mover to win in these markets. We've executed and proven our strategy in our operational capabilities with the Canadian assets. If and when we're able to scale into Texas, we'll be positioned for long-term success, especially if there's a future state where interstate commerce is allowed. We're on the record of saying that we do believe our Texas footprint would actually be lower cost of production than our Canadian footprint is today. So highly attractive long-term opportunity for us. And as I mentioned, our CBDistillery platform is direct-to-consumer CBD platform. There are a number of ways that business may be able to participate in future U.S. cannabis market, including that CMMI pilot I mentioned earlier. On Slide 15, just a quick summary of key financial performance from Q2 and over the course of the trailing 12 months. Important to note that this trailing 12 months is really the four quarters since we closed the produce transaction in May of last year. So phenomenal improvements in financial performance because of the catalysts we discussed with the produce transaction, increasing exposure to high-margin international markets and continued operational gains -- operational efficiency gains. A couple of other things I'll point out on the variances year-over-year in Q2. That's the quarter in which the produce transaction closed. So we did have about a $20 million gain on that sale in Q2 of last year, which drove the negative variance in net income for shareholders in Q2 of this year. And then on a trailing 12-month basis, still very strong profitability, EBITDA margins. And as we've mentioned, we feel like we're sustainably profitable to continue to grow our cash balance in the future, which will provide us opportunities to make attractive growth investments. About $73 million in cash on the balance sheet as of the end of Q2. It's a net cash position of about $33 million. I'll note here, it's been -- we've had these capacity expansion projects that we've been executing for the last year or so. Most of the CapEx on those is substantially complete at this point. So we will -- we do expect to have much stronger free cash flow generation in the second half of this year. Through the first 6 months of this year, in addition to paying $17 million in Canadian income taxes, $31 million in excise taxes and that $15 million in CapEx on those development projects, along with $7 million in share repurchases. We also completed a $15 million equity placement with two U.S. institutional investors back in June. That's been highly publicized, though it's -- we think having stronger long-term institutional interest in our shareholder base is an important part of the equation for the industry. Proud to have some lead steer institutional investors behind us now. And as I mentioned, we expect to grow our cash balance from positive cash flow from operations through year-end. And our insider ownership, about 10% of shares outstanding today. And also just note, as mentioned, after that recent equity placement with the U.S. institutional investors, we're about 25% institutionally held, which is actually well above average for our U.S. -- or sorry, our global cannabis competitive set. That pretty much takes us through the prepared remarks here. We've got some time for questions. So I'll open it up to questions if anyone would like to get into it.

Okay. So first question, what is driving continued growth in international medical cannabis exports? I think it's regulatory change in many cases. It's access to these markets because of the way the EU rules work on import and export of medical cannabis and sort of the domino effect that we talked about earlier. Just looking through the questions set here. What do you think investors most misunderstand about Village Farms today. I think people do not understand just the scale with which we operate and the fact that we have considerable runway to continue to grow into our asset portfolio. I think that's a key differentiator. I think there was a time when a lot of people were looking at this industry several years ago. There's been a lot of capital burned in people who have made poor investments. But we don't believe -- we're certainly not in that camp. We have a platform that's built to last. And hopefully, as people come back to look at the space more, I think we're one that stands out as really a long-term winner. Next question, first report on the Netherlands experiment came out from the government, who purely talks about potential overproduction from growers. Yes, just upped capacity to 10 tonnes, what are your thoughts? We are still growing everything we sell from our Phase 1 facility. And as I mentioned, that Phase 2 facility will be coming online and -- not seeing any concerns on our ability to move our product today. I think our track record of executing and being in this industry for a long time is going to help us in this market. We're positioned with, we think, some of the highest quality product and the experiment with that facility we built over there. That's where we want to be in that market, kind of the premium end of the value chain. But we're absolutely optimistic that this program is going to be expanded long term. If that does wind up happening when the pilot program is over, it will be about a 10x increase in the addressable market and be really attractive home run for us. Next question is about D3 to cannabis. Do we require any other electrical upgrades when we are ready to convert D1? That will depend on how we look at what -- I think there's a lot of optionality in how we could activate D1. It would certainly require some incremental investments in bringing in some incremental power and lighting, but if in the future state, when -- if we were interested in just having product for extraction in that facility, that's something we could look at cost effectively with some of our genetics. But I'll just note that the conversion from the second half of that D2 facility was about -- that's about a 12.5-acre expansion, and it costs about CAD 10 million for us to activate that. We're well able to fund that from cash flow from operations. So feel like those growth investments, if the demand is there, it was pretty easy for us to make those decisions. How -- a couple of other questions here. How sustainable are the recent improvements in cannabis gross margin? So we've consistently, for the last several quarters, been doing gross margins well above what we've historically talked about as our target range. And for us, like a long-term target range where we need to be successful in our business, we've said it's sort of a 30% to 40% gross margin. We've been well above that. That's driven by the more higher-margin international markets and the growth over there, which we think will continue to grow. And we've talked about the EU-GMP capacity in our mind, helping insulate us from some price compression over there. Long term, we certainly expect these markets to mature. How quickly that will happen? It's hard to say. Regardless with our cost leadership, we do feel like we're built to last and built to win and be successful sort of regardless of the timing of these events. We don't give formal financial guidance. It's something that we've discussed doing, but we really kind of wanted to wait to have our capacity expansions in Delta, in the Netherlands online and fully ramped before we revisit that. So that's something we may look to do in the future. I'll just refresh here. Looks like we've got a couple more minutes. Still on track to announce four international markets this year? It's certainly the hope. We said we expect to announce multiple new international markets this year. That is the plan. We've talked about the four. We haven't said which four we think we'll be into, but those four we do expect to enter. And looking forward to having that news out. We -- our process is to only announce once we have a first shipment to a market. We've got to deal with kind of getting onboarded with our permitting process and testing requirements to do those things, but still expect to enter multiple markets this year. And then just some questions on pricing. The increase in demand for international flower has created some new dynamics in the Canadian market. I think the pricing has sort of stabilized in the adult-use market from our standpoint. But there is a little more inventory available through the wholesale channel, I think, is -- there may have been a lot more operators who thought they were going to be able to get products into Europe who've had trouble with that. And so wholesale pricing has come down. We do break out our sales by channel in our results and wholesale has been a lower -- lesser part of the business for the last little bit. But it's still an important market and still opportunities for us to be profitable in that channel. We're looking forward to having the incremental capacity coming online from D2 to help us drive growth, both in Canada and in these international markets. I think that -- I'll just refresh one more time. And I think that will take us through the questions today. So I appreciate you all attending. We will be available for one-on-one meetings with the IAccess platform tomorrow. So please reach out to them if you'd like to spend some more time one-on-one. Thanks for listening to the story. We look forward to talking to many of you tomorrow.

Thank you. That concludes Village Farms International, Inc.'s presentation. You may now disconnect.